JIM MATTOX Attorney General

Supreme Court Bollding P. 0. Box 12546 Austin. TX. 76711. 2549 5121475~2501 Telex 9101674-1367 Telecopier 51Z475.0266

714Jackson. Suite 700 Dallas. TX. 75202-4506 2141742.6944

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An Equal OpportunityI Affirmative Action Employer 

# The Attorney General of Texas

November 9, 1983

Mr. Lyndon L. Olson, Jr. Chairman StateBoard of Insurance 1110 San Jacinto Boulevard Austin,Texas 78711 OpinionNo. ~~-88

Re: Whether article 3.68 of the Insurance Code applies to non-Texas business of a life insurance company holding a Texas certificateof authority

DearMr. Olson:

You have requested our opinion concerning the scope of article 3.68 of the InsuranceCode. Specifically,you askwhether the article requiresyour agency to revoke theMid-South Life InsuranceCompany's certificateof authority to transactbusiness in Texas. Article 3.68 of the Texas InsuranceCodeprovidesas follows:

Art. 3.68. No CommissionsPaid Officers

No life insurance company transactingbusiness in this State shall pay, or contract to pay, directly or indirectly, to its president, vice president, secretary, treasurer

. . . or to any officer of the company other than an agent or solicitor, any commission or other compensation contingent upon the writing or procuring of any policy of insurance in such company, or procuring a" application thereforby any person whomsoever,
or contingent upon the payment of any renewal premium, or upon the assumption of any life insurance risk by such company. Should any companyviolate any provision of this article, it shall be the duty of the Board of Insurance Commissioners to revoke its certificate of authority to transactbusiness in this State.
Mid-South Life Insurance Company (hereinafter "insurance company"),a Mississippi insurer,holds a certificateof authority to write life, health, and accident insurance in Texas. The insurance company owns 100% of the voting securities of MS Services, 1°C. (hereinafter "service company"), a Mississippi corporation. The president and secretaryof the two companiesare the same.

p. 371Mr. Lyndon L. Olson, Jr. - Page 2 (JM-88)

The insurance company and the service company entered into a service agreement in 1981,whereby the service companywould provide sales promotion services, clerical help, office space, office equipment, and other equipment, facilities, and support services for the insurance company. The agreement provided that the insurance company would pay the service company a fee based on the amount of annual "et premiumswritten.

The first question to be addressed is whether the payment of compensation under the terms of the 1981 agreement would violate article 3.68 if paid for the Texas business of the companies. The payment to an officer of the insurance company of any commission or other compensation contingent upon the procuring of any policy of insurancewould violate the statute. The 1981agreementprovides for the payment by the insurance company of a fee based on the number of premiums written; this fee is thus contingent upon the procuring of insurancepolicies.

The statute forbids the paymentby a" insurance company to "its" officers, directly or indirectly,of a commission. Although the 1981 agreement is between two corporations, it does contemplate the indirectpayment by the insurance company to "its" officers of such a commissio". The service company is a wholly owned subsidiary of the insurancecompany. The presidentand secretaryof the servicecompany are also president and secretary, respectively, of the insurance company. When the insurance company pays the service company a commissionunder the 1981 service agreement, it is indirectlypaying the officers of the service company. Because the officers of the two companiesare the same, theywould be receiving the indirectbenefits of the commissionpayments through their salariesor otherwise.

There are several policy reasons for this interpretationof the scope of article 3.68. First, if a life insurance company coul~d pay commissions to a subsidiary company whose officers were the same as the insurance company's, the" the intent of the statute could easily be thwartedby merely settingup "dummy"corporationswhen commissions
were desired. Second, this type of arrangement could be used to channel funds from the insurancecompany to the subsidiary,eventually leading to insolvency on the part of the insurance company and a subsequent inability to fulfill its obligations to policyholders. Finally, if one of the purposes of the statute is to prevent the promotion or condoningof unscrupulous selling techniques, then it is necessary to apply the statute to this agreement,because the service company rather than the insurance companywill be providing all sales promotion services.

Statutes regarding insurance should be liberally construed in favor of the public and the insured. Johnsonv. Prudential Insurance co. of America, 519 S.W.2d 111 (Tex. 1975). For the foregoing reasons, it is our opinion that the 1981 agreement does violate the statute.

p. 372Mr. Lyndon L. Olson, Jr. - Page 3 (~~-88)

P The two companies entered into another service agreement in 1982

which uapplies only to services in connectionwith Texas Business.” The agreement provides that the insurance company would pay the servicecompanya fee after the commencementofbusiness in Texas,but does not specify on what basis the compensation will be pa~id. According to the director of the legal staff of the Commissioner of the State Board of Insurance, the 1982 agreement was intended to provide that no commissionwould be paid based on the procurement of policies in Texas, as opposed to other states. We now consider whether the 1982agreementviolates article 3.68.

No direct authority could be found in response to this question other than an Attorney General Opinion, unnumbered (1926),Book 281, page 106, interpretingthe predecessor to article 3.68. This opinion provides in pertinentpart as follows:

I have your letter of recent date in which you ask for the opinion of this Department upon the legality of the practice indulged in by a life insurance company organized under the laws of Kansas whereby it pays to an officer commisslons upon life insurance business written by the companybut inwhich there is a specificwaiver of any right to any part of the commission derived frombusinesswritten in Texas

. . . .
It will be noted that [the predecessor to article 3.681doesnot confine the restrictionsto companies doing business under a charter granted by the State of Texas but every company which transactsbusiness in this state is prohibited in the most general terms from paying commission to its president and other executive officers upon life insurancepolicies written by it. We think that if any company transactingbusiness in this state, no matter where organized, shall violate theprovisionsof this article, it isyour duty to cancel its certificateof authority.

Under this interpretationof the predecessor of article 3.68 by this office, the 1982agreementwould violate the statute.

An analogous case to the instant situation is State v. State Mutual Life Assurance Co. of America, 353 S.W.2d 412 (Tex. 1962). StateMutual was a Massachusetts corporationwith its home office in Massachusetts. It held a certificateof authority to do business in Texas, and sold life, health, and accident insurance and annuities in .this state. The National Association of Securities Dealers (hereinafterNASD) was incorporated under the laws of Delaware. It had offices in Delaware and Washington, D.C., with member firms all across the country, includingmanymember firms in Texas.

p. 373Mr. LyndonL. Olson, Jr. - Page 4 (JM-88)

NASD instituted an i"S"lX."CS trust for the purpose of establishinga plan of group insurance for itsmember firms and their employees. Applications for group insurancewere mailed from NASD's office in Delaware to StateMutual's office inMassachusetts,which in turn issued andmailed group policies to Delaware, includingpolicies for twenty-fiveTexas member firms of NASD. The group policies were valid under the laws of Massachusetts and Delaware. They would not have been valid in Texas had they been executed and delivered in Texas, because article 3.50, section 3 of the InsuranceCode did not authorize group insurance for members of a trade association. That statuteprovided In pertinentpart as follows:

[I]t shallbe unlawful tomake a contract of life insurance covering a group in this state, and the license to do business in Texas of any company making a contract of life insurance covering a group in this state except as may be provided in this Article may be forfeited by a suit brought for thatpurpose . . . . The court stated that the "plainand unambiguous language"of the statute prohibited the coverage of trade association groups in Texas by contractsof insurance executed and delivered in stateswhere this typeof group insurancewas legal. The court next noted that to hold otherwisewould "destroy the effectivenessof article 3.50 and

. . . make a mockery of its purpose and intent." Finally, the court held that the statute "authorizes cancellation of the license to do business in Texas of any companywhich executes and delivers anywhere
a contract of insurance covering a" unauthorized group in Texas, irrespective of the validity of the contract where executed and delivered." Id. at 414-15.

-
As in the State Mutual case, the plain and unambiguous language of the statute at issue here mandates a" even-handed applicati.onof the prohibition against commissions to officers on both out-of-state and in-state business. Article 3.68 applies to any life insurance company transactingbusiness in this stateand forbids "any commission
or other compensationcontingentupon thewriting or procuring of 3 commissio" or other compensation contingent upon the writing or procuring of s policy of insurance in such company." (Emphasis added). The legfslaturemade no distinctionbetween foreigncompanies and domestic companies or between commissionsmade on Texas policies and foreign policies, although it makes such distinctions in other codeprovisions. See,e.g., Tex. Ins.Code arts. 3.12 and 21.43.
Furthermore, public policy and legislative intent appear to require equal application to commissionson both domestic and foreign policies. Article 1.14-1of the InsuranceCode provides in pertinent part:

p. 374Mr. Lyndon L. Olson, Jr. - Page 5 (JM-88)

The Legislature declares that it is

. . . concernedwith theprotectionof residentsof this state against acts by persons and insurers not authorized to do an insurance business in this state by the maintenance of fair and honest insurance markets

. . . by protecting authorized persons and insurers,which are subject to strict regulation, from unfair competition by unauthorized persons and insurers and by protecting against the evasion of the insurance regulatorylaws of this state.
Article 3.24-lprovidesas follows:

When a foreign or alien company has complied with the requirements of this Subchapter and all other requirements imposed on such companyby law and has paid any deposit imposed by law, and the operational history of the company when reviewed in conjunctionwith its loss experience,the kinds and nature of risks insured, the financial condition of the company and its ownership, its proposed method of operation, its affiliations, its investments, any contracts leading to contingent liability or agreements in respect to guarantyand surety,other than insurance,and the ratio of total annual premium and net investment income to commission expenses, general insurance expenses,policybenefitspaid and requiredpolicy
reserve increases,indicatesa conditionsuch that the expanded oueration of the cornDan"in this State & its operations outside this state will not create a conditionwhich might be hazardous to its policyholders, creditors or the general public, the Commissioner shall file in the office the documents delivered to him and shall issue to the companya certificateof authority to transact in this State the kind or kinds of business specified therein. Such certfficate shall continue in full force and effect upon the condition that the company shall continue to comply with the laws of this State. (Emphasis added).
Thus, the legislature has indicated that it is concerned with operations of a company outside Texas as well as within Texas, if those operationsmay have an effect on Texas policyholders, creditors
or the generalpublic.
Commissions paid to officers of an Insurance company, eve" if restricted to out-of-state business, would have a potentially

p. 375Mr. Lyndon L. Olson, Jr. - Page 6 (JM-88)

hazardouseffect on policyholders,creditors,or the generalpublic in Texas. Companyofficers set companypolicy governingattempts to sell life insurance policies to the public. If officers receive commissionsbased on the number of policieswritten, they may advocate unscrupulous selling techniques or ignore malfeasance by insurance agents so that their income will not be affected. This situation would affect all policyholders, whether located in Texas or not. Furthermore, in our opinion, one purpose of the statute is to prevent overselling of insurance policies, which would impair the financial well-being of the company. If policieswere oversold in other states, even if not in Texas, the overall financialwell-being of the company would be affected. Insolvency of the companywould certainly affect Texas policyholdersand the Texas public as well as the policyholders andpublic in those stateswhere commissionsare allowed.

Another compelling reason for applying article 3.68 to this arrangementbetween the insurance company and the service company is that to fail to do so would discriminate unfairly against domestic insurers in favor of foreign insurers. A domestic life insurance company that also did business in other stateswould be in violation of article 3.68 if it gave its officers commissions on its out-of-statebusiness. There is no rational reason to treat foreign insurersdifferently.

Under this interpretationof article 3.68, Texas is not seeking to prohibit a contractual arrangement made between the insurance company and the service company in another state. “It seeks only to take away from a foreign insurance corporationwhat is finally and essentially a privilege,"which is the ability to do the business of insurance in this state. Texas doesnot deny full faithand credit to the laws of the state where the contract was made by denyi~ngthe insurer the right to do business in Texas if the contract would be unlawful ifmade in this state. Statev. StateMutual Life Assurance Co. ofAmerica,supra, at 419.
This application of article 3.68 does not violate the Commerce Clause, because Congress removed all Commerce Clause limitations on the authorityof the states to regulate thebusiness of insurancewhen it passed the McCsrran-FergusonAct, 15 U.S.C. section 1011, et seq. Western and Southern Life Insurance Company v. State Board of Equalization of California, 451 U.S. 648, 653 (1981). Furthermore, the Privileges and ImmunitiesClause is inapplicableto corporations. Id. at 656. - Finally, this application of article 3.68 does not deny the insurer due process of law. A statutedenies substantivedue process rights if it does not bear a rational relation to a legitimate state purpose. Exxon Corp. V. Governor of Maryland, 437 U.S. 117, 124 (1978). The courtswill assume that the objectivesarticulatedby the legislature are the actual purposes of the statute. Minnesota v. CloverLeaf CreameryCompany, 449 U.S. 456, 463 n.7 (1961).

p. 376Mr. Lyndon L. Olson, Jr. - Page 7 (JM-88)

The test for determining the validity of an application of a statute suchas the one at hand iswhether the state is regulatingthe business of insurance within the state, or is reaching beyond its borders to regulatea subjectwhichwas not of its legitimateconcern. Osborn v. Ozlin, 310 U.S. 53, 62-67 (1940). In the Osborn case, the Court held that a Virginia statute prohibiting the writing of insurance on riskswithin Virginia except through residentagentswas constitutionalunder the Fourteenth Amendment. In Hoopeston Canning Company v. Cullen, 318 U.S. 313 (1943), the Court upheld the constitutionalityof New York's practice requiringan lllinoiscompany to subject its Illinois contracts to New York regulations when insuring New York risks. As in the instant case, these laws and regulationsreachedbeyond theborder of the statewhere a licensewas sought, and actually controlled the financial and other internal systems of the company in its home state and other states. The Supreme Court held that this scope of authority was constitutional. Id. at 320-21. -
In State v. State Mutual Life Assurance Company of America, a, at 416, the court held that a statemay condition the right of
a foreign corporation to do business in the state on compliancewith all reasonable regulations. The application of article 3.68 to the insurance company for payment of commissionson out-of-statebusiness bears a rational relation to legitimate statepurposes, including the protectionof Texaspolicyholders.

SUMMARY
The arrangement by which a life insurance company pays a fee to a subsidiarywhich has the same president and secretary as the insurance companybased on thenumber ofpolicies soldwould violate article 3.68 of the Texas Insurance Code. Even if the arrangement were made between two foreigncompanies,and no commissionswere paid on Texas business, the payment of commissions based on out-of-state business would violate article 3.68.
Very trulyyour 

# L-L-J*

.

JIM MATTOX AttorneyGeneral of Texas

TOM GREEN FirstAssistantAttorneyGeneral

DAVID R. RICHARDS ExecutiveAssistantAttorneyGeneral

p. 377Mr. Lyndon L. Olson. Jr. - Page 8 (JM-88)

Preparedby MargaretMcGloin AssistantAttorneyGeneral

APPROVED: OPINION COMMITTEE
Rick Gilpin,Chairman Jon Bible SusanGarrison MargaretM&loin JimMoellinger Nancy Sutton

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